While heatedly campaigning for the US elections, Donald Trump threatened to raise tariffs to 100 percent on imports from many countries, including India, terming India as the "biggest charger of tariffs." Earlier, when he was President, Trump had called India a "tariff king", and in June 2019, he eliminated India’s preferential tariff status for exports to the US.
The European Union (EU) has put in place a carbon border adjustment mechanism (CBAM), which will come into full force in January 2026. The CBAM will subject Indian exports of steel and aluminium to the EU to additional ‘tariffs’, linked to the higher than normative carbon emissions embedded in these goods.
The imposition of higher tariffs by the US is contingent upon Trump getting elected as President again on 5 November. There is, however, no ambiguity about the EU carbon tariffs kicking in.
The US and EU are India’s major trade partners. How should India respond to these disruptive challenges?
India Barely Survived the 2019 Damage
In 2018, India became a collateral victim of Trump imposing higher tariffs of 25 percent and 10 percent on steel and aluminium products, meant primarily to hurt China.
Later, India’s import tariffs on Harley-Davidson motorcycles really angered Trump. In November 2018, he castigated India, saying, "You send a motorcycle to India, there’s a 100 percent tariff."
India did indeed levy high tariffs on automobiles. However, to buy peace with Trump, India reduced tariffs on motorcycles to 50 percent. Still, Trump remained unreconciled.
Quite a few US industries had their own complaints against India, including our restrictive measures on medical devices and data localisation, the denial of market access for agriculture and animal husbandry products, procedures related to telecom testing/conformity assessment, and tariffs on ICT (information and communication technology) products.
In May-June 2019, Trump withdrew India’s ‘preferential status’ available since 1975 under the Generalised System of Preferences (GSP), as India was designated as a ‘beneficiary developing country’. This status allowed Indian exporters to ship many goods to the US without duty payment or with very low tariffs.
The withdrawal of the preferential status resulted in these goods being subjected to normal tariffs. Indian exports of about $6 billion, in about 100 tariff lines, were adversely impacted. India initially tried to play down the impact but soon decided to retaliate by imposing higher import tariffs, up to 70 percent on a select 28 US products. Trump did not back down. India postponed the enhanced tariffs for some time to soften the US. Yet, the withdrawal of the preferential status remained unchanged.
India took many trade disputes to the World Trade Organisation. The US did the same. The trade environment between the US and India deteriorated quite significantly in the last years of Trump’s presidency.
India could retrieve some of the lost ground after Trump’s departure in 2020. Cross cases in the WTO have been withdrawn by both sides. India lifted most of the retaliatory tariffs, with eight of these removed in September 2023 before the G20 meeting.
In the Trade Policy Forum (TPF) meeting held in November 2021, India underlined the significance of the restoration of GSP benefits. The US Commerce Secretary noted the same for suitable consideration. The subject figured in subsequent meetings as well.
However, GSP benefits are yet to be restored.
CBAM Will Cause Real Pain
India-EU trade talks have been in the works for years. Last week, on 11 October, Commerce Minister Piyush Goyal singled out extraneous elements like CBAM for slowing down the trade talks.
He also termed the EU’s deforestation regulations and CBAM ‘unfair’, which would impact Indian industries adversely. He also found the EU’s safeguard measures on some steel products ‘irrational’. He dropped enough hints about India taking ‘retaliatory measures’.
CBAM will apply to the import of cement, iron and steel, aluminium, fertilisers, hydrogen and electricity into the EU from January 2026. India exports mostly steel to the EU. Indian exporters have begun reporting carbon dioxide (CO2) emissions.
From January 2026, these exports will be subject to a carbon price fixed by the EU. However, credit will be provided for the ‘carbon price’ (tax, levy, fee or emission allowance) paid in the exporting country. The carbon price will have to be paid by purchasing equivalent carbon certificates.
The Indian government has attacked CBAM as an unlawful non-tariff measure and has put trade talks on a slow burner. None of these threats is likely to work.
The EU has taken high moral ground by linking CBAM to its goal of achieving a 55 percent reduction in the carbon intensity of GDP (from 1990 levels) by 2030 and net zero emissions by 2050. There is no discrimination made between EU producers and the others.
Alternative technologies exist to produce the same steel with lesser specified carbon emissions. The CBAM price actually neutralises such higher costs.
Not abiding by CBAM will only hurt India.
Corrective Steps
Trump loves being a bull in a China shop. High tariffs on whatever consideration — national security, domestic industry protection, tariff abuse etc — will be the order of the day if he comes back to power.
He will find this easier to do as there is widespread anti-China sentiment in the US and the EU. The recent imposition of high tariffs on the import of electric vehicles (EVs) from China both in the US and the EU is a case in point.
India is not a big trade threat like China for the US. However, high tariffs on automobiles, liquor and a few other goods make India easy prey to be dubbed as a tariff king.
The contribution of such high tariffs in protecting the Indian industry is also open to question. It is high time India takes a hard look at these provocatively high tariffs. If these few provocatively high tariffs exist and Trump comes back, there is every reason India would be targeted.
In fact, both the US and the EU are looking for friendshoring their current China imports to India. India has a grand opportunity to seize the moment.
The recent decision to set up a joint semiconductors production facility in India for usage by India and the US military is one example. It is quite possible that Trump, even if he gets re-elected, might become a big friend to India and direct American investment in India instead of subjecting imports from India to higher tariffs if we do not have provocative tariffs.
The best way to deal with the EU's CBAM is to invest in CO2 emissions reduction technologies for steel production. Additionally, the government may undertake tax reforms to take advantage of the provisions relating to carbon prices in exporting countries by refunding taxes embedded in the export of steel to the EU.
If there are still gaps, it will be better if India levies the differential as a carbon tax in India and uses the proceeds for industry transformation.
There is no point in fighting an unjustifiable battle that you are sure to lose.
(The author is former Economic Affairs Secretary and former Finance Secretary of India. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)
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